British Pound Ups the Rate Speculation with CPI, Jobless Claims and BoE Minutes

New Zealand Dollar May Follow Aussie Lower if 1Q CPI Cools Further

Gold Holds Three Year Bull Trend for Another Week, Stimulus Debate Becoming Serious

Dollar Rallies to End the Week, Risk Trends Will Remain Top Concern

Referring to a weekly chart of the Dow Jones FXCM Dollar Index, the greenback was worked its way into a loaded period of congestion. We now find the currency holding a 200-pip range just below a 14-month range high that has prevented a larger bull trend reversal. The risk is clear. What is not clear, however, is what will catalyze the inevitable break – whether that will be bullish or bearish. This past week was a good representation of both the bullish and bearish factors for the greenback that continuously circulate yet consistently fall short of that critical sentiment shift. What we need is a fundamental change that categorically changes the dollar’s value in the global market.

Over the past week, the world’s reserve currency seemed to temper its correlation to risk trends. While the S&P 500 equity index (my favored measure of investor sentiment) phased from a tentative reversal to aggressive bounce, the dollar seemed responsive only when carry interest swelled. Should we expect this one-sided risk role to persist over the next week and beyond? The hang up for the usually equanimous safe haven was the drop in Treasury yields alongside sentiment-based assets. Normally, this wouldn’t have been a concern for a currency with such an exceptionally low rate. But the strong 10-year yield jump in previous weeks roused enough speculation of an accelerated stimulus withdrawal that the correlation warped. Yet, now back within the range low of the past six months, that premium should be mostly worked off.

So, now we head into a new trading week with a currency that should have greater freedom of movement if capital markets continue to fall apart. That is an opportune situation as the S&P 500 is on the verge of a genuine bear trend. That said, we are still in need of fuel to feed the fledgling drive. Earnings will be a highlight for capital market participants that have based much of their optimism on investment that has circumvented still-weak consumer spending. The reemergence of the Euro-area crisis is another loaded catalyst for the global market. And, of course, there remains the stimulus debate. The Fed seems to have quashed speculation of QE3, but there are other central banks increasing balance sheets.

The fundamental outlook for the Euro-region hasn’t changed significantly over the past months. Rather, the market’s appreciation of the risks and what it would mean for exposure in the region have. And, when investors want to exit before the crowd, it naturally touches off a flood. How extensive and violent any deleveraging becomes depends on two factors: the underlying balance of risk trends and the intensity of regional trouble. With benchmarks for sentiment starting to take a turn for the worse, the euro is already in a sensitive position. Fundamental traders should keep a close eye on Spain’s financial health. The country’s 10-year yield is just below 6 percent, credit default swaps trade at record highs and the ECB’s lending to the Bank of Spain surged to a record high €316 billion in March. Spain is looking more and more like Ireland or Portugal. Other highlights to watch include the ECB’s SMP bond purchase report and the Spanish and Greek bond auctions on tap.

Japanese Yen Retreats for a Second Week, Officials Growing Antsy

Bank of Japan officials and politicians were no doubt relieved back in February when the central bank’s announcement of an additional 10 trillion yen boost to the asset purchase program finally felled a multi-year USDJPY bear trend. From the beginning, however, it was clear that wouldn’t be a straight line decline for the funding currency. The policy group’s efforts to devalue the currency are no doubt significant, but they do not carry enough weight to alter the yen’s position as a long-term funding source for yield spread-derived trades. And, that means strong anti-risk / anti-carry winds will naturally force deleveraging that boosts the yen. The question is whether the BoJ will try to fight the natural course again.

Australian Dollar: RBA Minutes Impact will Leverage Rate Expectations

Normally, the RBA minutes would have little to no influence over the Australian dollar. The statements that Governor Stevens usually leaves us off with are sufficiently transparent in their intentions. The last policy decision from the central bank was pretty clear as well, however, the threat of an imminent rate cut generally leverages more intense focus. More specifically, the Governor suggested that another trimming of the benchmark rate depended on the pace of the 1Q CPI figures do out the following week. While we wait for the results of that data, traders who have already driven the currency lower through rate forecasts will pick the statement apart to assess the intensity of their dovish stance.

British Pound Ups the Rate Speculation with CPI, Jobless Claims and BoE Minutes

Interest rates and monetary policy have been and will be primary drivers for the sterling, but it just so happens that monetary policy has been on ice for the Bank of England. The only changes to come through are bond purchase program (QE) increases that are signaled well ahead of time. Further intentions beyond these efforts are simply not offered up. Yet, traders will still set the bar through their own speculation. That sets us up for a unique view further ahead the policy curve with both inflation and employment readings to compliment the BoE’s minutes.

New Zealand Dollar May Follow Aussie Lower if 1Q CPI Cools Further

When talking about fading interest rates amongst the high-end of the yield curve, the conversation has remained almost exclusively on the Australian dollar’s ills these past weeks and months. The exemption for the kiwi may soon come to an end however. A key reason the currency has limited its sensitivity to negative sentiment trends is that we haven’t seen a momentous bear trend arise for risk. Another factor is New Zealand’s own economic balance. We have 1Q CPI due for release next week, and the annual clip is expected to cool even further.

Gold Holds Three Year Bull Trend for Another Week, Stimulus Debate Becoming Serious

A bullish close on the week for gold is a boon for long-term bulls. At current levels the precious metal is dangerously close to the long-term trendline that has stood as the backbone to the bull trend that began at the height of the financial crisis back in 2008. Traders will have noticed that volume has materially dropped and all swells have been tied to selling efforts. Furthermore, futures open interest is at its lowest point since September 2009 and Fed stimulus expectations have eased. Is there enough anti-inflation, alternative-store-of-wealth demand out there?